Shares of Starbucks Corporation SBUX hit a new 52-week high of $52.23 on May 29.
The U.S. coffee chain is probably enjoying a golden period in its history hitting new highs almost every month this year. In this calendar year so far, its share price has gone up roughly 29%.
Starbucks enjoys healthy fundamentals — strong global retail footprint, successful food/beverage innovations, best-in-class loyalty program and digital offerings, rapid growth in international markets and the consistently impressive CPG growth.
The Zacks Rank #3 (Hold) stock delivered strong performance in both the quarters of the first half of fiscal 2015 and is poised well for the second half as well.
Strong Quarterly Results
On Apr 23, the coffee chain reported yet another solid quarterly performance delivering exceptional sales growth in second-quarter fiscal 2015. Earnings of 33 cents per share grew 18% driven by 18% increase in revenues and higher profits. Successful food/beverage innovation, strong traffic trends in America and China Asia-Pacific (CAP) stores and incremental revenues from Starbucks Japan primarily drove sales. In the reported quarter, the coffee giant took over 100% ownership of its Japanese JV — Starbucks Coffee Japan, Ltd. — per a deal announced in September last year.
What to Expect in the Second Half?
Despite significant investments in digital initiatives and greater employee investments in 2015, Starbucks is capable of strong earnings growth. The company’s investments in employee welfare include increased pay rates for barista and shift supervisors, additional performance-based recognition programs, new food benefit policies as well as the new online college education program in collaboration with the ASU.
We believe that better top-line performance backed by a range of sales drivers and various cost saving initiatives should boost earnings in the second half of 2015.
Digital efforts like mobile order/pay and delivery services, food and beverage innovation, lunch and evening programs, Starbucks Reserve premium coffees and Teavana teas can fuel stronger comps growth in the Americas, going forward. This, coupled with continued growth in the CAP and Channel Development segments, may lead to stronger sales trends in fiscal 2015.
Starbucks’ Mobile Order & Pay initiative, launched last year, is now available at select stores in Portland and over 600 stores across the Pacific Northwest. This initiative allows customers to order before arriving at a Starbucks cafe. The company also expects to introduce food and beverage delivery in collaboration with on-demand delivery service, Postmates, in Seattle, and through its own employees in specific office buildings of New York City, like the Empire State building, later this year.
These new digital initiatives are expected to quicken service, increase convenience and enhance customer loyalty, thereby driving mobile payment transactions.
Starbucks is also building its Starbucks Reserve ultra-premium coffee brand. It opened a Reserve roastery in Seattle in Dec 2014. With the roastery, Starbucks expects to double the small-batch roasting capacity of its ultra-premium coffee brands and expand their availability to 1,500 stores globally. Moreover, the company plans to open 100 upscale Reserve Roastery stores over the next five years.
Key Picks in the Sector
Better-ranked restaurateurs include BJ's Restaurants, Inc. BJRI, Zoe's Kitchen, Inc. ZOES and Ruby Tuesday, Inc. RT. All these stocks sport a Zacks Rank #1 (Strong Buy).
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